“End of an Era for PE” - Marc Rowan
Rowan claimed it’s the end of an era for PE on Q2 earnings call, as tailwinds (low rates, high valuations) dissipate. Tbf, think private credit is multiples of their PE assets now, so he’s schilling the other side of book, but have heard this a few times now. I don’t think the decrease in attractiveness of the asset class is lost on anyone (see shtshow fundraising market), but curious which areas of private equity people think may fare better than the pack. Maybe the answers are industry based, but more so thinking of strategy (reliance on leverage, etc.). Surface level, would think big guys relying on a lot of leverage and auction processes fare worse, while more nimble shops doing more buy and build, strategic, less reliance on leverage do better. Curious what people think.
Credit and secondaries
Agreed, was going to say secondaries.
What are secondaries?
Joke isn’t funny if everyone knows the punchline… secondary pricing pulled in materially in Q2 and the amount of fundraising (see Jeffries report) pretty much matches the growth in the opportunity set.
This is great if you’re a sponsor and enough dumbass LPs fall for the trick. Secondaries has been and always will be a levered 1.4-1.7x net and mid teens IRR. Yeah, maybe it bumps up a bit if you do complex secondaries but regardless, it’s PE junior and you’re still taking a lot of equity risk.
TL;DR secondaries is a portfolio tool that has beneficial cash flow characteristics early in the development of a PI program. It’s not worth locking up Capital otherwise.
Okay Marc
I‘d say in the last years PE funds were performing really well on the back of the mentioned tailwinds without actual value accretive work by many funds. Going forward, strong funds will continue to generate good returns but many shops won’t get sufficient new money and will close down eventually.
He’s not wrong - it’s interesting because every PE founder / manager in recent weeks/months has stated that “yeah we may be going into recession but actually if you look at the vintages just post GFC, it was the best time ever to invest, So recessions are the best time to allocate to PE”
what these statements fail to acknowledge is that post GFC we had the biggest bull run in history and sharp decline in interest rates and QE - perfect conditions for PE. The complete opposite is happening now so the argument doesn’t hold
PE is going to be challenged for at least 2-3 years
Imagine being a PE Associate at Apollo grinding it out and hearing your CEO on live television saying it’s the end of the road for PE.
Apollo never runs out of ways to fuck their associates
I think it’s all a bit overhyped in terms of how bad things will be - personally think APO is just trying to position themselves well vs peers and justify mediocre PE results (“oh well end of an era for PE, luckily at APO we have private credit growing at xx%).
Higher rates in theory just means lower valuations from PE firms, and given most PE firms are competing with each other in the typical auction, it shouldn’t really matter for returns - in 2021 everyone I worked with was complaining about how good assets were trading for 2x what they should be worth, and now all everyone complains about is interest rates. Point being there’s enough money and smart people in this space that it will never be easy to succeed, but that doesn’t mean there’s not long term potential.
My personal outlook is well see a lot more zombie funds who previously grew fast and then blow up and end up riding the curve back down to a smaller fund size. HFs and other investment firms blow up and go away all the time, and just because that hasn’t been as common in PE doesn’t mean it won’t start, especially in tech funds.
That said, there will always be an interest from allocators in PE of various size ranges and will always be plenty of opportunity for good managers to succeed.
Who needs Marc Rowan when you have anonymous Associate 1 in PE
Marc LARPing as asso to stay humble
100% this. Tens of millions of American companies are private, and more are staying private for longer. Unless you think public markets that are shrinking are the future, there is no other option. Unless of course you want to bet that the entire country's hard work and efforts are uninvestable. As long as equity is worth something, you'll always have investors hanging around, whether competition is higher or lower than previous periods.
I agree with another poster that the days of multiple arbitrage and cheap debt are over. Naturally, the days of AI, technology, and value creation must then be here as the new differentiators of growing a business and partnering with founders and management teams. Private equity, growth equity, and venture capital are just vehicle types. The real strategy in the end is just what you deem is the value of the future of companies.
Totally agree. I think people view these posts from the lens of “which career path/industry will supplant PE” but I was more so wondering what type of equity provider will supersede traditional PE, because the answer to that isnt private credit or secondaries - those are not replacements for private companies’ need for equity capital in the US.
Yea, agree. APO PE results are VERY mediocre and their public investors hate the business / refuse to put any multiple on the earnings (why ARES trades at such a premium, in addition to the life insurance capital intensity). Rowan is trying to get investors to focus on the spread businesses.
My 2 cents going forward for PE despite the benefit of increased allocations:
1. Value creation is key - LPs will dissect fund performance and those that made returns simply from multiple arbitrage with little to no buy & build will be dropped.
2. Bar is raised as current 4th (and some 3rd) quartile funds die, some 3rd quartile will take their place.
3. Top-performing funds that have continuity (no succession issues, no major Partners leaving) will continue growing.
I think it's a cycle. As funds die there will be less competition from people who overpay and eventually returns will pick up again. Then LPs will return and history repeats.
More specifically, I expect the so-called mega funds and generalist MM funds to benefit (they can sell the idea of being flexible and not dependent on single sector in macro downturn). Naturally, distressed and special sits investing should also pick up.
Two things:
1) if you believe in long term American economy, owning equity in companies will always be important. If debt is sucking up your returns, then simply don’t take on debt. Only reason firms take on debt is it increases equity returns. People forget debt is not necessary and the equity holders determine leverage, not PC or banks.
2) alternative to private equity is public equities. So long as Elizabeth Warren, Nasdaq ESG committees and other “consumer protection” boards keep regulating, there will be more value in private ownership than dealing with their BS
I think this is a publicity stunt as others have said, with that being mentioned, APO definitely does have top returns and is actually a value investor so believe they will do well.
With that aside I find it actually comical how all these PE funds who claim they are such talented investors actually bought shit sandwiches right at the top. Lmaooooo
I'm not really sure why this is news worthy, Apollo's PE team has always targeted credit like assets and the firm as a whole has been focused on credit for years. Marc Rowan has been preaching this to LP's for years.
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